What is cafe 125 on my W-2, and what do I do with it as far as my taxes are concerned?

Union dues reported in Box 14 typically represent post-tax deductions, meaning they do not reduce taxable income like “S125” contributions. Educational assistance benefits, which can be tax-free up to $5,250 annually under Section 127 of the Internal Revenue Code, may also appear in this box if offered by the employer. Understanding the differences among these entries helps employees accurately interpret their W-2 forms and ensure proper tax reporting. A Section 125 ‘cafeteria’ plan is so-called because you get to choose your benefits from a menu, like choosing food at a cafeteria. However, while the plan may offer many benefits, ​box 14​ of your W-2 shows only the benefits that apply to you.

• “Cafe 125” on your W-2 form encapsulates a spectrum of employee benefit choices.
• These contributions reduce taxable income, offering significant tax advantages.
• These plans allow employees to pay for certain qualified benefits with pre-tax dollars.

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Since these contributions reduce your taxable wages, they may also reduce the wage base used to calculate your unemployment benefits, resulting in slightly lower unemployment payments. However, the long-term tax savings from participating in the plan often outweigh this potential short-term impact on unemployment benefits. While Cafeteria 125 plans are beneficial for most employees, there are some situations where participation might not be advantageous. For example, if you’re in a very low tax bracket, the tax savings might be minimal compared to the flexibility of after-tax dollars. A Cafeteria Plan allows you to choose between receiving your full salary as taxable income or selecting specific pre-tax benefits that reduce your taxable income. The term “cafeteria” refers to the flexibility of selecting benefits much like items in a cafeteria.

Employees can only elect up to $3,050 in salary reduction contributions, excluding any rollover amounts from previous years. If an employee accidentally contributes over this limit, the plan retains its status if certain conditions are met, like uniform application of terms and correction of excess contributions. However, some employers use Box 14 to report amounts that should be entered on your cafe 125 w2 employee’s personal tax returns. A Code S125 refers to a Section 125 plan which describes payroll deductions for an employee benefit.

What is Adjusted Gross Income on W2?

As the IRS ramps up enforcement efforts, taxpayers should have a good understanding of what tax fraud is, and the penalties they may face. Section 1202 can benefit start-ups and entrepreneurs by allowing owners to sell small business stock tax free. The penalty for filing a false tax return can be steep, and including monetary fines and prison time.

If you’ve noticed Cafe 125 on your W-2 tax form, you might be curious about its meaning and how it affects your taxes. Cafe 125 refers to the Cafeteria Plan under Section 125 of the IRS tax code. These plans allow employers to offer a range of pre-tax benefits, such as health insurance, dependent care assistance, and flexible spending accounts (FSAs). Under Cafe 125, adoption benefits provided by employers are exempt from federal income tax withholding.

Your last pay stub for the year includes pretax deductions in your gross wages. The amount you get after reconciling your W-2 should usually match what’s on your pay stub. Box 14 on the W-2 form can include various entries, each with distinct implications. While “S125” reflects pre-tax benefits under cafeteria plans, other entries may pertain to state-specific taxes, union dues, or educational assistance programs. The IRS sets an annual contribution limit of $5,000 for single filers or married couples filing jointly and $2,500 for married individuals filing separately.

We strive to write accurate and genuine reviews and articles, and all views and opinions expressed are solely those of the authors. You’ll choose “Cafe 125” benefits during your initial enrollment period or during designated open enrollment periods, typically held annually by your employer. It’s like a window of opportunity for you to review, adjust, or enroll in various benefit options.

On top of that, you can’t also see the cafe 125 plan in Box 16, which is a space allocated for tips and state wages. Cafeteria plans are also known as Section 125 plans, referencing that section of the IRS code, hence the name Café 125. Section 125 plans are available to all employees, as well as their spouses and dependents. What you will see on your W-2 is a reduction in your gross wages because the cafeteria plan lowered your salary. For example, if you earn ​$50,000 a year​, but you receive ​$4,000 per year​ in cafeteria benefits, you are only paying taxes on ​$46,000 annually​.

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An IRS offer in compromise is a great way to settle tax debt – but most get rejected. Our partners cannot pay us to guarantee favorable reviews of their products or services. We believe everyone should be able to make financial decisions with confidence. The beauty of these choices is the flexibility, letting you craft a compensation package that aligns with your unique circumstances. Being aware of and understanding these options empowers you to make strategic decisions about your overall benefits package.

Since these benefits are paid for with pre-tax funds, employees are also not eligible to claim any of them as deductions when completing the tax-filing process. Contacting a tax professional is also advised for workers with more detailed questions about their cafeteria plans. For example, if an employee allocates $2,500 annually to a healthcare FSA, that amount is deducted from their gross income, decreasing their taxable income. This reduction may lower their overall tax liability and, in some cases, their tax bracket.

• When it comes to taxable benefits, like cash wages, your employer withholds taxes.
• Stay informed about current limits and adjust your contributions to maximize tax advantages without violating IRS regulations.
• By opting for non-taxable benefits such as health insurance or a flexible spending account, you’re reducing your taxable income.
• This could make you eligible for IRA deductions or Roth IRA contributions that you might not have qualified for otherwise.

What Does Cafe 125 on Your W-2 Mean? Understanding Section 125

Take the time to evaluate your healthcare needs, anticipated medical expenses, and other benefit requirements. By choosing the right mix of benefits through your Cafeteria 125 plan, you can maximize your tax savings while ensuring appropriate coverage. When selecting, consider factors such as your health status, family size, and financial goals. It’s important to note that reducing your taxable income through Cafeteria 125 contributions can affect other tax-related items. For instance, it may lower your Adjusted Gross Income (AGI), impacting your eligibility for certain tax credits or deductions.

Choose the right options for your business with the help of licensed professionals. These circumstances in and of themselves are not enough to justify a special open enrollment. Employees usually have to provide a marriage license, birth certificate, letter from an insurance company or other documentation to prove their eligibility.

Section 125 plans enable employees to allocate a portion of their salary toward eligible expenses like health insurance premiums or flexible spending accounts (FSAs) before taxes are applied. These contributions lower gross income, thereby reducing taxable wages and overall tax liability. Employers report these amounts in Box 14 to inform employees of the deductions from their wages for these benefits. While the “S125” code itself does not directly alter tax calculations, it serves as a reminder to factor in these pre-tax contributions during tax and financial planning. These deductions not only decrease the employee’s taxable income, but also reduce the employer’s payroll tax liabilities.

To sponsor a section 125 plan, businesses must employ an average of 100 or fewer employees during either of the preceding two years. Premium Conversion Plans, also known as Premium Only Plans (POP), allow employees to pay their portion of health insurance premiums with pre-tax dollars. For instance, if an employee pays $200 monthly in health insurance premiums, their annual taxable income is reduced by $2,400.